Integrated environmental risk management in real estate transactions

Abstract

Traditional risk management posits a rational, five‐step process for managing risks. The outstanding difference between this traditional process and the environmental risk management process lies in the technicality and complexity of step one (identifying and analyzing environmental risk) and of the first part of step two (examining the feasibility of alternative risk management, specifically, risk control techniques). The two main differences between the environmental risk management process in the context of a transaction as practiced today, and when a transaction is not involved, are that the first step is even more complicated in the former case, and that environmental lawyers managing such transactions do consider risk control as well as risk financing techniques together, but usually stick to indemnification as a risk transfer technique and ignore insurance. Insurance is, in many ways, preferable to indemnification as a risk transfer technique, and should also be a standard provision in the transactional document. There are policies available now that can cover the risks that need to be covered, and that can be manuscripted to fit in with the transaction, but care should be taken that they actually cover the risks. Insurance should be considered and applied in at least two stages of the process: at the beginning, during the risk identification and analysis stage, and in the middle, in negotiating the environmental provisions of the purchase and sale agreement.